A banking tale of tortoise and hare
Twenty years ago, if you had asked any equity investor which bank's shares were destined to outperform over the next two decades - HSBC or Standard Chartered - he would have laughed in disbelief at your question. The answer was obvious: HSBC, of course.
Back then, HSBC was riding high, thanks to its dominance of Hong Kong's highly lucrative banking cartel. Flush with cash, its boss at the time, the redoubtable Willie Purves, was plotting his move into the global big time with the takeover of Britain's ailing Midland Bank.
In contrast, Standard Chartered was so accident-prone, it had become known among financiers as the banana skin bank.
A perennial takeover target following a string of poor business decisions, Standard Chartered had only survived a 1986 hostile bid from Britain's Lloyds Bank after supporting large share purchases by a group of white knight shareholders.
But bad luck and poor judgment continued to dog the bank. Its defence against the Lloyds bid led to an investigation by the Bank of England, and in 1987 it was forced by international disgust with apartheid to divest its South African business.
Hit hard by the 1987 market crash, Standard Chartered had no choice but to sell its US subsidiaries and launch a rights issue in order to strengthen its badly depleted capital base.
Even then the bank continued to struggle. Downgraded by the ratings agencies after making hefty provisions against bad loans, in 1991 Standard Chartered was hit by a massive run on its Hong Kong branches as depositors withdrew HK$2 billion in a single day amid rumours the bank had lost its London licence.
The following year the bank found itself embroiled in a US$1 billion Indian share trading fraud. Then in 1994 its Hong Kong securities arm was banned from participating in new stock offerings by the Securities and Futures Commission following a series of price manipulation and rat-trading scandals. Meanwhile its bullion trading arm was accused of bribing government officials in Malaysia and the Philippines.
Not surprisingly, with its share price hammered by the string of disasters, in the mid-1990s Standard Chartered once again became the object of intense takeover speculation.
Then the Asian crisis struck, and as its regional earnings cratered, the bank saw its share price slump by 65 per cent in just over a year.
The next few years were tough, but Standard Chartered managed to retain its independence (although one chief executive was ousted for favouring a takeover) and eventually clawed its way back to growth.
And how the bank has grown since, thanks to its fortunate concentration on Asia's fast-emerging markets, especially India. Yesterday Standard Chartered announced net income for 2009 of US$3.28 billion, its seventh year in a row of record profits (see the first chart below).
True, the earnings picture wasn't quite so pretty on a per share basis, thanks to the diluting effect of a GBP1.78 billion rights issue in 2008 and a GBP1.02 stock placement last year (see the second chart).
But with an enviably strong core tier 1 capital ratio of 8.9 per cent, the bank is now well placed to grow its business in Asia at the expense of weaker competitors.
'We didn't just weather the crisis, we turned it to our advantage,' chief executive Peter Sands boasted yesterday.
Meanwhile, Standard Chartered's great rival HSBC stumbled badly during the boom years, acquiring US subprime consumer finance business Household International in a US$16 billion deal that has since cost it US$10.6 billion in lost goodwill and US$40 billion in bad loan charges.
As a result, Standard Chartered has not only closed the price performance gap with HSBC, it has finally overhauled its bigger cousin on a 20 year time horizon. As the third chart below shows, Standard Chartered's shares have appreciated by just short of 1,200 per cent since the beginning of March 1990, while HSBC's have climbed by a relatively lacklustre 860 per cent.
As a result, at 1.85 times book value, Standard Chartered's stock now commands a hefty premium over HSBC's shares, which are trading at a price to book ratio of just 1.4.
And if you were to ask almost any investor which of the two stocks is most likely to outperform over the coming years, they would stare at you in amazement and answer 'StanChart, of course.'